British inflation is sticky to set a high bar for faster rate cutting

All focus on the current British economy circle is in the job market – and whether Thursday’s work figures are bad enough to pressure the Bank of England being a faster loosening rate.

But the latest inflation rate, which shows the headline inflation rises to 3.6%, suggests that the bank will continue to move carefully when it comes to decreased levels.

Importantly, service inflation – key metric for Boe – remains at 4.7%, the expectation will subside. There are many opportunities where this data has been driven by an unstable or less relevant area of the service sector, but this does not seem to be one of them. Indeed, our “core service” metric is generally taken in June.

The train fare suddenly rose (it fell at the same time last year), while the catering price, which represented a quarter of the service basket, has increased a little faster in the past. That may be related to the increase in national insurance in entrepreneurs, as well as a major increase in national wages.

It is still feasible to say that service inflation continues to increase mostly by regulated price increases or categories that are inherent to the back. The increase in April road tax, for example, added around 0.3ppt for overall service inflation. The rent also adds almost one percentage point, but this contribution is regulated up to almost half of the next few months. The growth of private sector leases slows down, while local authority/social housing leases are limited to a much lower growth rate this year.

The fact that so many service baskets are rearranged only once per year in April means that service inflation will struggle to move significantly lower before the spring next. But at that time, we thought it would be far closer to 3% of 4%, and that was something we thought, we were suspicious.

However, this latest data seems to set a fairly high blade for faster levels. The fact that headline inflation approaches 4% does not help. Head of Economist Boe Huw Pill is just talking about internal research, which shows that inflation has the habit of being more rooted when CPI reaches this level.

We are more skeptical about it, at least in the current economic environment, at least because the job market seems to be deteriorating. Thursday payroll data is truly important. If the surprising numbers are not revised and/or if the June number is equally bad, it can be a catalyst for banks to rethink the current heart approach to judge cutting. However, for now, we expect to cut “gradually” in August and November.
Source: Ing